Austrian Steelmaker Offshores Production To ... Texas

Labor is expensive in Austria, and heavily unionized with strict work rules governing what workers can and can’t do, and with long mandated vacations, and all sorts of other welfare-state goodies, and yet the unemployment rate of 4.7% is the lowest in the Eurozone, and one of the lower rates around the world. Austria is a small industrial powerhouse, dependent on its largest export partner, Germany, to which it is, economically, joined at the hip.

Nevertheless, there are issues: shaky TBTF banks exposed to Eastern European “growth opportunities,” such as Hungary; Alpine Bau, a construction group with 15,000 employees that just went bust; Germany whose economy is stagnating; and now offshoring by the steel industry.

The voestalpine Group, a steelmaker based in Linz, Austria, with over 46,000 employees, saw its revenues for 2012/13 decline by 4% to $15 billion. It blamed the “cooling down of the global economy,” and “dwindling momentum in Asia (especially China).” It doesn’t see a scenario that’s exactly rosy [the CEO of Siemens had sketched a similar scenario: my take.... “During The Last Crisis, We Had China,” Now We Have No One].

Like many titans, the company is under pressure to increase profits while revenues are declining. Hence the need to cut costs. One solution: offshoring to cheap countries! So the company announced in its annual report, right at the beginning, as one of the hope items, that it would undertake “its largest ever foreign investment – construction of a direct reduction plant,” not in cheap countries like China or Indonesia, but in Texas.

Now the contracts have been signed. The plant, on Corpus Christi Bay, would be built by German industrial conglomerate Siemens and consortium partner, MIDREX Technologies, a US company that was acquired by Japanese steelmaker Kobe Steel three decades ago. The plant will use the MIDREX process to produce Hot Briquetted Iron (HBI), or sponge iron, an “excellent pre-material for the manufacture of crude steel.” And at least half of the plant’s capacity of 2 million metric tons will be shipped back to Austria, to the company’s steel production sites in Linz and Donawitz.

The plant will employ 150 people. But their cost in Texas won’t differ enough from the cost of 150 people in Austria to justify the investment of $715 million – plus the cost of shipping 1 million metric tons of HBI a year to Austria. There must be another reason. And there is: “In contrast to using purely coke-based blast furnaces,” the company said, “the planned direct reduction plant will only use natural gas.”

So there are some green aspects: natural gas is “much more environmentally friendly as the reducing agent,” the company claimed. It would help the company improve its “carbon footprint” and achieve its “ambitious internal energy efficiency and climate protection objectives.” Sounds great, and it looks good on company PR materials. But it’s corporate blah-blah-blah: natural gas is available in Austria as well; no reason to go all the way to Texas.

But there’s a real reason: survival!

The price of natural gas in the US is “about one quarter of the price in Europe,” the company conceded. It would allow the company to produce low-cost HBI for its plants in Linz and Donawitz and ensure “their competitiveness in the long term.” Minus the corporate PR jargon, it would sound like this: They’d be competitive with Chinese steelmakers; they’d get to stay in business!

So one Austrian steelmaker decided to construct a plan in the US based on the availability of copious and cheap natural gas. But it isn’t the only foreign company to dip its big ladle into this resource. Since natural gas prices hit rock bottom in early 2012, a number of companies, American and foreign, have announced plans to build facilities in the US to take advantage of what they consider a natural gas nirvana – and not just those that use gas as energy, but also those that use it as feed stock for the production of chemicals and fertilizers.

That sea change came out in the annual survey by the Association of German Chambers of Industry and Commerce (DIHK). When asked about their overseas expansion plans, these German industrialists showed how their priorities were shifting: the only region in the world that actually moved up in importance was the US. In 2005, only 20% of the German companies wanted to invest in the US. By 2012, it had risen to 26%. In 2013, it jumped to 30%, the highest ever. They cited a variety of reasons, particularly natural gas [my take.... “But the Rising Star Is the USA”].

The math by these energy-starved German CEOs might get a bit twisted in the future. While the price of natural gas in the US nearly doubled since the low in April last year, it remains below the cost of production for “dry gas” wells in many areas. The industry has been bleeding. And drilling for dry gas has been curtailed drastically. But even major price increases in the US would likely pale compared to the sky-high prices in Germany, largely determined by long-term contracts with Russia’s Gazprom.

Consequences of these costs are now oozing to the surface. Germany’s recovery from the Financial Crisis was steep, and in 2011, the gloating started. They called it the German “success recipe,” a superior system that would keep the economy growing even amidst Eurozone mayhem. That optimism has endured, and stocks have hit new highs, but the economy has diverged sharply. Read.... Blinded By Optimism, German Economy Now Below Stall Speed